Growth rates have inevitably fallen as revenues scaled up through $210 million in fiscal 2014 and $313 million in fiscal 2015 (the year end is January 31st), but the company has continued to post healthy net income in the 12-15 percent range. (it is due to report Q2 financials next Thursday August 27th).
What's even more remarkable is that Veeva reached IPO having raised just $7 million in venture finance (more than half of it from those canny investors at Emergence Capital). The rest of its remarkable growth was financed from operations, and the business continues to generate substantial cash surpluses to supplement the more than $200 million raised from the offering.
A significant factor in its low cost to get started was the decision to build its application natively on the Salesforce platform. This reduced its development costs and completely avoided any need to invest in datacenters and servers of its own in the early days. Of course this means that it hands over around 15 percent of its revenues straight to Salesforce in subscription fees, but that's very similar to what other SaaS vendors spend on their own infrastructure.
Another price that Veeva has paid is that of being firmly locked in to the Salesforce platform. Last year Veeva signed a 10-year contract that commits it to pay a minimum of $500 million to Salesforce before September 2025 — somewhere between $40 and $50 million each year.
Meeting specific industry needs
The key to making this work is to build significant extra capabilities on top of the Salesforce foundation to meet the specific industry needs of the target customer base, as Paul Shawah, Veeva's VP of product marketing, explained to me in a phone briefing last month.
A lot of innovation we deliver is different from the innovation Salesforce delivers and our customers benefit from the sum of the two.
Veeva now claims more than 200 customers in the life sciences industry although there's a notable skew towards a small number of large accounts — its top ten customers account for more than half its revenues. This skew helps to explain Veeva's massive average annual revenue per customer (AARPU), which Redpoint's Tomasz Tunguz calculated based on its S-1 filing for the IPO at $780,000 per customer.
Its ability to capture those accounts — largely from established on-premise software vendors such as Oracle (primarily its Siebel products) and IMS Health (which recently acquired key European player Cegedim) — stems from the increased need in the industry to adapt to change. Shawah explained:
A lot of what's driven the trend towards Veeva has simply been the need to move faster. Their business needs to change, their systems can't keep up.
The cloud platform is a crucial component in enabling that capacity for change because the architecture allows for iterative enhancements over time, he said.
Because it's multi-tenant cloud, we're able to incorporate the industry's feedback so that it gets better over time. We build it once so that every customer gets access to it and can switch to it much faster. So it comes down to speed and flexibility.
The business case may be cost reduction or harmonization but the business result of that is they're able to be much more nimble with software that just gets better over time.
In its eight years of existence, Veeva has maintained a consistent pace of three new releases each year, so that it is already at version 24 of Veeva CRM.
That multi-tenant foundation also helps Veeva deliver a globally consistent product that caters for the varying requirements of separate geographic markets. This is another aspect that customers value, Shawah said.
Building its own technology
While almost 85 percent of total revenues (and nearly 90 percent of subscription revenues) come from the original Veeva CRM built on the Salesforce platform, Veeva is now building out other product offerings on servers of its own. These products manage documents and data to meet the specific regulatory requirements of the life sciences industry:
- Veeva Vault manages and stores regulated content, such as promotional materials, clinical trial documentation and so on.
- Veeva Network uses an industry-specific data model for managing customer master data.
- Veeva OpenData connects up with industry partners to provide a single, validated source of customer reference data.
These work together, for example to ensure that each time a sales rep sends an email to a customer they have all the necessary approvals and clearances in place to do so and that the content is compliant with requirements. Traditionally, content approval has been managed separately from CRM, so bringing these systems together removes previously manual processes, said Shawah.
What sounds like a very easy thing to do is actually quite difficult but we've removed that burden and made it quite simple.
Customers don't have to worry about making these pieces all work together. It delivers speed and flexibility and enables them to do things they may not have been able to do before.
Building extra functionality of its own is more about Veeva adding competitive advantage in the life sciences market than sidestepping its reliance on Salesforce. The ten-year agreement between the two companies explicitly restricts Veeva to selling its sales automation products "only to drug makers in the pharmaceutical and biotechnology industries." In return, Salesforce has foresworn direct competition in the same market although if it broke that agreement Veeva's only recourse would be to move to another platform.
When it started out, Veeva might have picked some other industry, CEO Peter Gassner once said. Now that it has committed itself to life sciences, its success has inspired others to follow in its footsteps in other industries — one of them, Vlocity, is targeting several industries at once, as I'll discuss in a follow-up article next week.
For those who follow, Veeva has shown what can be done. As Shawah told me:
I think it validates the idea and the model. This is a natural progression for enterprise software companies to take this sort of evolution. We're going from horizontal cloud to vertical solutions, to more of this vertical cloud.
Updated: An earlier version of this article mis-stated Veeva's venture finance as $8m instead of the correct figure of $7m.
Disclosure: Salesforce is a diginomica premier partner.
Image credit: Digital medical concept with male figure holding tablet computer © vege – Fotolia.com.